The consumer, the ower and the owner

This is a post from staff writer Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool’s Rule Your Retirement service.

Happy Day After Christmas! Do you feel like you’re getting rich slower?

Yes, ’twas the season for all kinds of holiday traditions, including, of course, Coca-Cola commercials. They’ve been a part of the holidays since the 1920s, and may have even played a role in shaping our current image of Santa. Readers of my vintage will remember the classic “I’d Like to Buy the World a Coke” commercial in which a bunch of singing hippies with candles form a Christmas tree. (I should have put “hippies” on my Christmas list.)

I bring up Coke because I think it’s the perfect demonstration of the three types of people in our economy: the consumer, the ower (i.e., someone who owes money – I know it’s not a real word, but I like it anyway), and the owner. Of course, we’re each a bit of all three, but the more you’re like the last one – which requires limiting your behaviors of the first two – the brighter your financial future.

Here’s why…

1. The consumer

As you may have heard, almost two-thirds of our economy is driven by consumption. That includes a broad range of expenses, from buying stuff to paying for services. It’s not all bad; in fact, most of it is necessary. When economists talk about “consumption,” they’re talking about everything from food and shelter to utilities and health care. It’s tough to get through life without that stuff.

But we also know that a lot of consumption doesn’t add much value to our lives, and it certainly isn’t necessary. I’ve recently taught a couple of classes about money to elementary- and high-school students, and I’ve brought with me a bag of 37 empty Coke cans and bottles. (Fun fact from AdAge: Each American, on average, consumes 44.7 gallons of soft drinks each year.)

Assuming an average cost of one dollar per beverage, the bag represented $37 worth of spent money. But it has since been consumed. Where did it all go? Well, I didn’t go to medical school (despite being pre-med in college), but I’m pretty sure most of it eventually was deposited in the public sewage system, with a bit of it hanging around long enough to decay some tooth enamel or add some extra jiggle to a belly or thigh. But most of what remains of that $37 is a bag of garbage.

For those who drink a Coke or other packaged drink (Coca-Cola owns more than 3,500 types of beverages, including juices, teas, and water), that is $365 a year spent on sugary water… which sometimes doesn’t even have the sugar. Plus, you have to buy that with after-tax money; you first must earn $450 to $500 and then pay Uncle Sam and Sister State to be able to spend $365.

And now it’s gone. Which brings us to the lesson of the consumer:

A decade from now… a year from now… even a month from now, you won’t value (or even remember) much of what you buy now.

2. The ower

OK, so spending hundreds of dollars on something that is soon forgotten (except for the deleterious health effects) isn’t the best way to allocate your assets. But it’s not the worst thing in the world. Putting such things on the credit card is much, much worse. Now, you’ve become both a consumer and an ower.

Here’s what the math could look like.

Let’s say you put that $1-a-day Coke habit on a credit card. If you had $365 on your credit card right now, and the interest rate was 15 percent (the current national average), and you paid a monthly payment of $20, it would take you 21 months to pay off all those Cokes, plus you’d have added $52 to the $365 you paid. It is very, very hard to grow your net worth if you spend $417 on something that initially cost $365… and you still don’t have anything to show for it. Which brings us to the lesson of the ower:

If you use a credit card excessively and don’t pay it off every month, you could be paying for today’s purchases several years from now, and not deriving anything of value from those purchases. They’ve become all pain, no pleasure.

3. The owner

What’s better than buying a bunch of Cokes? Buying the company.

Right now, you could own a tiny piece of Coca-Cola the company. Some of you might already. How? By owning shares of Coke stock. When you buy shares of stock in a company, you become a genuine, honest-to-goodness part owner. Right now, a share of Coke trades at around $37 – which is why I brought 37 empty bottles and cans to the classrooms I visited. Someone could buy 37 drinks and have a bag of garbage to show for it, or they can buy a piece of the company.

Now, one share of Coke would make you a very, very, VERY small owner, given that there are 4.5 billion shares of Coke. And practically speaking, it’s difficult to buy just one share – though Coca-Cola, like many companies, has a direct purchase plan that allows you to invest as little as $50. But once you own a share, you enjoy the benefits – and take on the risks – of being a part-owner of the company. As for the benefits, you get:

1. Dividends: The company sends you cash, which, in the case of Coca-Cola, is $1 a year and growing. (Over the past decade, Coke has increased its dividend more than 9 percent, on average, each year.) You can spend the dividend on a Coke, or use it – along with all your other dividends – to buy more shares, which pay more dividends, which allow you to buy more shares, and so on. I have compared dividend reinvestment to owning a garden of money trees that grow more and more cash, because they get bigger and allow you to expand your green-growing garden by buying more trees.

2. Capital gains: Hopefully, the value of the company – and your shares – grows over the years. A dollar invested in Coke in 1982 is worth (as you know) $37 today. Of course, that’s not guaranteed. In fact, Coke stock hit its high of $44 waaaaay back in 1998. In other words, after 14 years, the stock is still down. But that’s the risk of being an owner. However, while that looks like an investor has lost money on Coke over the last 14 years, that wouldn’t be true if she reinvested her dividends, because she’d own many more shares of Coke – actually, becoming a bigger owner – and realized a total return (capital gains plus reinvested dividends) of 30 percent. But even if she hadn’t been reinvesting her dividends, owning a share of Coca-Cola worth $37 is still better, financially, than spending $44 on several six-packs of Coke in 1998.

This brings us to the lesson of the owner:

Spend your money on assets that will pay you and (ideally) be worth more money in the future.

Have a Coke (or a coffee) and a smile

Now, I’m not saying that you shouldn’t buy Coke or other soft drinks. After all, we all need to drink, and sometimes a soda hits the spot. While I’ve given up most sodas for health reasons, my weakness is coffee, especially at this time of year (I love gingerbread lattes!).

But I have tempered my coffee consumption, both in terms of quantity and cost (purchasing lattes only during the holidays). And, more importantly, I’ve increased my ownership by buying Starbucks stock, which makes me a part-owner of the company.

So to all of those frequenters of Starbucks, I thank you for your business. Please come again.

I don’t drink much soda, but when I do I drink it at work (once or twice a week, if that) so work pays for it.

I’m a fan of the gingerbread lattes as well. And since I’m mentoring a younger professional in my organization, I have a mentor budget and one of the things we do is head out to Starbucks for coffee and a chat so, you guessed it, work pays for at least half of my holiday lattes.

Don’t worry about work, they make out fine. I put in 10-12 hours day so that “free” soda once or twice a week is paid for by me. And the mentoring activity pays off if my mentee sticks around for a few extra years. Plus they are investing tons of other money in her training. The $500 mentor budget is small change compared to the other costs.

For me, tracking my spending from day to day in Quicken provides these same kinds of messages. I get a little chart at the end of each month and its a sobering message to see how much I’m spending on ordering in for lunch on a day to day basis.

This makes sense to me if all you care about is making money, and since this is a personal finance blog, it seems legitimate to present that perspective.

However, all of the reasons it’s bad for you to buy cokes are also reasons it’s bad for other people to buy cokes (garbage generated, adding to their waistlines/tooth decay, putting them in debt, etc.), and if you buy coke stock you are supporting people who try to convince other people to buy lots of coke (through ad campaigns etc.) and then profiting from it.

That’s why I always hesitate about buying stock in certain companies–if I care about other people, why would I support (and profit from) an organization trying to convince them to do things that are bad for them?

Thank you, Meg, for saying exactly what I was thinking! I am sure you said it more eloquently that I could have written!

Investing is very challenging for me because I want to put my money into places I believe are socially responsible. If I don’t believe in it or support it (like Coke), I don’t want to be an owner of it. I realize this decision may not be the best for my returns, but the health of my community is also important to me. Will we ever starting placing value on health and wellness and less on consumption and GDP.

I’d love to see some posts on socially responsible/environmentally responsible investing, if the editors are listening.

This is SO HARD!! I did some research years ago when I was first beginning to invest. We ended up buying a few shares of green energy, but only with our fun money. I need my retirement accounts to grow and be strong, and the few shares that I buy or don’t buy would have a less-than-negligible impact on the companies in question. So I invest in things that pay and make my social choices with my day-to-day spending instead. I think that makes a much bigger difference.

Robert, thanks for the clear, illustrative analysis of the three segments of market players. The way you show it makes a lot of sense. Good reminders that (1) I never want to be an “ower,” (2) I want to keep consumption to a relative minimum (i.e., not more than I personally feel I need, plus a little want), and (3) I’m looking to grow my ownership share in certain funds, which is best done by sticking to points (1) and (2).

Thanks for sharing! It’s a great reminder on how to look at money and making your money work for you. Hopefully 2013 will bring opportunities for me to balance out some of my consumerism with a bit more ownership!

I’ve read about people who quit smoking, and bought stock in cigarette companies with the saved money. They’ve done really well. If you’re OK with owning a cancer creator, then Altria is yielding over 5% right now, and Philip Morris is yielding almost 4%. Maybe use that logic to quit Coke and buy some KO?

Also, don’t worry about your coffee. Researchers have been trying in vain to prove that it’s unhealthy, and they can’t. Most research to date shows that it’s actually good for you (even 5 cups a day!. It’s simply the cream and sugar that are unhealthy. Drink it black and you’re good to go.

I’m debating whether to buy Starbucks of Dunkin Donuts stock. I’ll probably go with Starbucks because I like Howard Schultz. He’s been on CNBC a few times and seems like a really bright guy. Plus, the stock has a lower valuation. I’ll have to read more about both. I like coffee companies because when we figure out that our food is causing most of our diseases, people are going to have to give up a lot of their favorite things. They’ll be thrilled to not have to give up coffee.

I disagree with this statement: As you may have heard, almost two-thirds of our economy is driven by consumption.

The economy is driven by production and savings, not consumption. Consumption is the end game, like eating. Eating doesn’t save you from being hungry: hunting and foraging do. Anyone can eat. I did a blog post about this if anyone’es interested. Americans are brainwashed to think that depleting their savings is good for the economy, and that China benefits from our consumption. Hopefully we figure out real economics before we’re forced to.

We bought Starbucks when it was $5/share and everyone said they were going under. Not only has the stock price shot up and stayed, but now they pay dividends as well. Timing is everything – though being psychic would be nice too.

I use this system as well. I try to “buy what I know” when it comes to stocks and that way, I don’t feel too guilty for purchasing those products. If I am craving something salty, then I will grab a bag of Terra chips instead of Pringles since I have stock in Hain. I think all of you should also buy a bag of Terra Chips or sip on some Celestial Seasonings tea!

I didn’t pull the trigger on Hain at 35 and now I’m kicking myself. Would you mind sharing how you came to invest in Hain?

I, too, like their products, and I also like their CEO Irwin Simon. He addressed the growing importance of healthy eating and gluten-free products in the 2009 Annual Report, and I thought that that was a prescient and accurate analysis. They also have a great relationship with Whole Foods, which I did buy But, like I said, I didn’t buy Hain

I bought Hain in 2006 and it has definitely been a winner for me. I purchased it because I buy so many of their products. I didn’t do much research beyond what I kept seeing in my grocery cart and people around me. Whole Foods opened three stores near me and Jewell started an “organic aisle” during that time that was stocked with many Hain products so I figured the trend would continue. Luckily, it has but you are right, it is getting beaten up right now. Still, I love their products, their mission, and it is a company I can stand behind.

Wow, good for you. Thanks for sharing. That was a very unfortunate time for many people who bought stocks, and I’m sure it wasn’t fun watching it crash. But even then, you still picked one of the few stocks that was actually a good investment back then. Bravo.

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Eileensays:

26 December 2012 at 1:00 pm

Thank you, Robert…I understand now! Great post. As good as the old GRS. Many thanks.

Great post! I agree that we spend a lot of bucks on stuff we don’t need and stuff that is actually harmful to our health and general well-being. If we could save all the money we spend on chocolates and junk food and what not, we could use it on wiser choices like buying shares of the company or better yet, buying fruits and veggies, which is not only easy on our health, but studies have actually shown people eating fruits and veggies instead of fried food feel more positive and optimistic about the future.

pack of 365 brand organic black tea which is $4 for 80 bags works out to 5 cents a cup (or less, if you use the bag for more than one cup). Can even splash out and add a little sugar or honey for a little extra. I want to save money and have an enjoyable hot drink.

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